June 14, 2010 / 7:34 PM / 9 years ago

UPDATE 2-US House, Senate clash on credit ratings crackdown

* Franken spokesman: House language “very concerning”

* Private equity fund registration exemption also eyed

* Senate-House conference to debate both issues on Tuesday (Adds Franken spokesman comment, background)

By Kevin Drawbaugh

WASHINGTON, June 14 (Reuters) - U.S. House Democrats on Monday moved to kill a Senate plan to overhaul the credit rating agency business, setting up potential fireworks at a meeting on Tuesday of a panel writing Wall Street reforms.

Representative Barney Frank proposed dropping a proposal, drawn up by Senator Al Franken, to create a government panel that would act as an intermediary between debt issuers and credit rating agencies for new structured securities.

Instead of setting up the panel, Frank called for commissioning a Securities and Exchange Commission study of the ratings agency industry, perceptions that it suffers from an inherent conflict of interest, and what to do about it.

A spokeswoman for Senator Franken said in a statement that Frank’s counter-offer was “very concerning.”

“We don’t believe a study is necessary. We know what went wrong with Wall Street’s credit rating system — conflicts of interest eroded it by rewarding cozy relationships instead of accuracy,” said Franken spokeswoman Jess McIntosh.

“And we know how to fix it — the Franken amendment that passed the Senate with broad bipartisan support,” she said.

Both Frank and Franken are Democrats. Their disagreement highlights the extent to which the conference committee process, which began last week, will be an all-Democratic affair, with Republicans largely left on the sidelines.

Credit rating agencies were widely criticized for their role in the 2007-2009 financial crisis for badly over-rating subprime mortgage-backed securities that later imploded, triggering a credit crisis that brought Wall Street to its knees.

The crisis tipped the U.S. economy into a deep recession, led to massive taxpayer bailouts of Wall Street banks and unleashed a wave of financial reform initiatives worldwide.

FIXING AGENCIES A TOP GOAL

Fixing the troubled rating agencies is a top priority of Democrats seeking a regulatory revamp. The issue affects leading agencies such as Moody’s Corp (MCO.N), Standard & Poor’s MHP.N and Fitch Ratings LBCP.PA.

Both the Senate and the House have approved regulatory reform bills. A conference committee is trying to merge them into a single bill. Once finalized, possibly by the end of the month, it would need to win congressional approval once more before going to President Barack Obama to be signed into law.

The conference committee, chaired by Frank, will hold its second public meeting on Tuesday and is scheduled to deal with the credit rating agencies issue, among other topics.

As proposed by Senator Franken and approved last month by the Senate, a new government intermediary panel would assign ratings responsibilities for new structured securities to ratings agencies on a semi-random basis.

The plan aims to address the perception that the rating agencies’ existing “issuer pays” business model — in which debt issuers pay agencies for ratings — leads to overly rosy assessments by agencies seeking to keep issuers’ business.

The less-ambitious House reform bill approved in December did not attempt to change the agencies’ business model. Instead, it called for more SEC oversight of the agencies and for exposing them to greater risk of investor lawsuits.

Frank said in a statement that House Democrats also want to strike from the conference bill a Senate provision that would exempt private equity funds from having to register with the SEC, as hedge funds will have to do under bills approved by both chambers.

In addition, he said the House wants to set a $150 million minimum assets-under-management threshold for hedge funds and other private funds that must register with the SEC, instead of the Senate’s proposed threshold of $100 million.

The conference panel will meet at 11 a.m. on Tuesday. (Editing by Dan Grebler)

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